Matt Miller: Three years ago, Capital did an important thought piece on The New Geography of Investing that I know you were intimately involved with. Talk about what that means and what the implications are for clients.

Rob Lovelace: The New Geography isn’t a new concept, but there came a point in time when we finally had a better way to talk about where companies do business. For many, many decades, the best proxy for where a company did business was simply to talk about where it was based. Where it was listed, where it was domiciled, where it received its mail — those were almost always the same place: so, a U.S. company based in New York, listed on the New York Stock Exchange, doing business in the United States. Country of domicile was a perfect way of identifying what risk would come with that company.

As globalization has occurred, as trade has increased, there are more multinationals. But it still didn’t get to a point where we had a better proxy — even though we knew that country of domicile was no longer as accurate as it used to be — to identify where a company did business and for identifying, therefore, what kind of opportunities and risk you’re getting in the portfolio.

What’s changed in the last 10 or 15 years is more companies are reporting using revenue where they do business. Profits would probably be the best, but not enough companies report it. But revenue they’re willing to report, at least by region and increasingly by country. So we can now build a better profile of where a company actually does business through its revenue rather than just country of domicile. That’s what we’re calling The New Geography: where companies do business by revenue. What you find that’s interesting when you do that is that there is a lot more diversification than would be implied by simply looking at your portfolio through the country-of-domicile lens.

Matt Miller: Say more about that. What is the diversification, then, that you’re getting? You’re actually exposed to more countries’ economies than one had thought?

Rob Lovelace: Exactly. When you look at the largest companies in particular, most of them are doing business in multiple geographies, multiple countries. In the U.S., for example, about 30% of the revenue of the S&P 500 comes from outside the United States. Japan has a similar number; it’s about 30%. More dramatically, Europe has about 50% of its revenue coming from outside of Europe. It makes some sense because the European economy hasn’t been growing as fast, and many of the companies — in Germany in particular, but elsewhere in Europe — really built themselves on being export-driven. And so they export a lot to the United States and do a lot of business in the emerging markets, China in particular.

I think the U.K., England, is probably the most interesting example. More than 80% of the revenue comes from outside of the U.K., which is why when Brexit happened, the market didn’t necessarily go down very quickly because there isn’t a lot of representation of the English economy in the stock exchange itself. It really was reacting more to a weak currency, which actually meant, on a translation basis, the companies would look better.

Matt Miller: Fascinating. And it stands to reason, because England is a little island nation and so most of its national champions have to have their sales from overseas.

Rob Lovelace: Exactly. Wonderful companies that do well, but the biggest markets are elsewhere.

Matt Miller: Now, more recently, I know that Capital has been involved — and you’re a co-author — on a white paper called The New Breed of Global Companies that’s building on the New Geography concept. What’s that about?

Rob Lovelace: In the discussion around The New Geography, we were really looking at multinational companies and trade or new markets for their products; it was very product-based. And that’s still true. When you think of the great branded companies — the Nestlés and Coca-Colas of the world — these are companies that really operate global[ly], and that fits with The New Geography: thinking about where they do business through revenue rather than domicile.

But there’s another whole generation of multinational companies that work in services or just anything in the tech world beyond the components. If you think of Amazon or Priceline, many of these other companies, they are truly global companies, but they’re not moving anything across borders, except maybe a little electricity, right? It’s a very different generation of multinational. Or those that are simply providing services: the intellectual property of what they’re doing. And that’s also moving around in a very interesting way. So we’re focused on both of these aspects of it. But it really changes our concept of what trade means and where the value can be found.

Matt Miller: And so the different nature of this new breed of global company, what’s the significance of that for our team’s investment thinking?

Rob Lovelace: I think if you look at each country individually, what you’ll find is we still think about the world in a very industrial, old-economy way. All the debates we have right now around productivity not changing, it’s because we’re still using these measures that measure goods. There are ways that we are tracking services as well; they get captured in some of the trade statistics. But the value-add that you see from an Amazon or a Priceline — and some have highlighted that maybe it’s because they help more on the leisure side, so Priceline is focused on travel — but still, there’s a clear actual value added to the economy.

We tend to still — in our economic statistics and in the way most people even talk about benefits to the economy — focus on that traditional multinational company with a product, with a brand, and not necessarily getting at this company that’s providing IT support for multiple jurisdictions and to customers that are based all around the world.

Matt Miller: Is one aspect of that that it just gives them a different growth potential in ways that might have been elusive for companies that were more of the brick-and-mortar type firms?

Rob Lovelace: In the world that we’re in right now, it becomes particularly important because people, I think, are worried about globalization; are worried about what’s going to happen as trade barriers are erected; are worried about if we have a trade war. I’m not sure how a trade war would necessarily affect these types of companies. I think in some ways it’s a more resilient model, and so it provides an interesting offset to concerns that if you go back to the very basics of trade — which is around commodities — commodities, for sure, are going to be caught up in any sort of changing pattern we have right now, because the agricultural products and steel and other things, for sure, are going to have increasing tariffs going forward.

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